Hungarian central bank analyses the impact of margin caps
Price restriction measures
1. From mid-March onwards, the government ordered that the commercial margin on 30 essential food items should not exceed 10%. This measure was initially set to run from 17 March to 31 May, but was later extended to 31 August.
2. In addition, a 15% margin cap on household goods has been imposed from 19 May until the end of the summer, as far as we know. This regulation applies to drugstores and covers products such as dishwashing liquid, detergent, and deodorant.
3. In addition, banks and telecoms operators have introduced 'voluntary price caps'. Financial institutions have committed to reducing the cost of banking for the public, while Telekom, Vodafone and One have postponed their planned tariff increases until around mid-2026.
The central bank estimates that
price restriction measures may reduce inflation by an average of 0.8 percentage point this year, which could be partly offset by cross-pricing of other products.
Of this 0.8 percentage point, 0.5 percentage point stem from the food profit margin restrictions, which also include the extension of the measure until the end of August.
Price margin caps on household goods and voluntary price restrictions on banking and telecommunications services could reduce the rate of price increases in 2025 by 0.1 percentage point for each measure. The measures are expected to have the biggest impact during the summer months, dampening inflation by about 1.6 percentage points.
No cross-pricing yet
The impact of profit margin restrictions on food and household goods is significantly influenced by whether retailers engage in cross-pricing,
the MNB staff said.
The disinflationary effect may be mitigated if retailers try to compensate for losses incurred on products subject to caps by raising margins on other products. However, there are no signs of this so far in the inflation data, with monthly price increases for products not subject to food profit margin restrictions remaining within the range seen in the months prior to the introduction of the measure (see chart below).
However, the longer supermarkets have to maintain a margin cap on the 30 basic foodstuffs the more likely they are to start raising prices on other products. Therefore, any extensions will become increasingly ineffective in moderating the pace of price increases.
The temporal scope of government measures causes uncertainty in assessing the inflationary impact of price restrictions, the MNB warned.
The food price margin cap has been extended from the end of May to the end of August, which will have a technical disinflationary effect of 0.2 percentage point on average price increases in 2025. However, the extension increases the risk that the sector-wide losses, estimated at HUF 50-60 billion per quarter, will be partially passed on to consumers by retailers, which would reduce the disinflationary effect of the measure.
As we reported in May, extensions can be expected. At the time, most of the analysts polled said that the measures could stay with us until the elections.
Another negative consequence of profit margin restrictions could be a reduction in the number and scale of discounts. According to competition authority GVH Price Monitor data, both the proportion of discounted products and the average discount rate have decreased since the introduction of the restrictions for the product groups concerned.
At the same time, no similar decline was recorded in product groups not subject to the caps (Chart 3-29). If profit margin restrictions lead to fewer discounts overall, this could moderate the disinflationary impact of the measures.
Profit margin restrictions on household goods appeared quickly in drugstore pricing, while shops not covered by the regulation have not yet made any significant adjustments, the central bank said.
According to high-frequency data collected by the MNB, prices in drugstores fell by an average of 23.1% in the first week after the price margin cap came into effect, compared to the previous week. By contrast, prices in non-drugstore chains selling household goods (which are not covered by the regulation) fell only slightly (-2.1%).
The MNB has calculated that the introduction of price restrictions on housing insurance and 25 OTC medicines will not significantly impact inflation this year.
Dark clouds are gathering
Price restrictions are temporary by nature and can only reduce inflation expectations in the long run if they also change companies’ pricing behaviour,
the central bank warned.
For the time being, favourable dynamics are prevailing, with perceived and expected inflation declining slightly in the household sector and corporate price expectations moderating more significantly.
While the introduction of price restrictions will moderate inflation this year, the withdrawal of these measures could raise inflation rates in the coming years to a similar extent,
the MNB staff warned.
Price restriction measures will reduce average price levels this year, resulting in a lower base for price increases in the coming years. Thus, when the measures are phased out,
restoring prices to their pre-measure levels will in itself have an inflationary effect, which will be roughly equivalent to this year’s disinflationary effect.
"The disinflationary effect of price restriction measures is thus temporary, which may dampen their impact on inflation expectations," the MNB said. In other words,
the price restrictions merely delay an increase in consumer prices until after April next year.
Cover image (for illustration purposes only): Portfolio
